(Photo by Win McNamee/Getty Images)
Getty Images
Federal Reserve Chairman Jerome Powell is under growing pressure to cut interest rates. At the Fed’s September meeting, financial markets expect a quarter-point reduction, with policy rates drifting toward 3% by the end of 2026. But once again, critics say Powell risks being late. His upcoming remarks on August 22 at the annual Jackson Hole Economic Policy Symposium could offer clues on how he balances political demands with the Fed’s current data-driven framework, and what tools could be adopted to guide decisions in the future.
Powell’s framework went through its own evolution during his tenure. Following the COVID-19 pandemic, he took a strategic view on the economy, expressing the view that inflation was transitory and caused by supply chain disruptions. He was proven wrong. Inflation rose above 9%, forcing the Fed to embark on the most aggressive tightening cycle in decades.
This embarrassing episode prompted Powell to alter the Fed’s approach to making policy decisions. Rather than attempt to preemptively respond to changes in the economy, he would adopt a more wait-and-see tactic, waiting for the hard economic data to confirm vulnerability on either side of its stable inflation or maximum employment dual mandate. Under Powell, forward guidance was replaced by data dependence.
As much as investors wish the Fed could forecast better, history says otherwise. Despite its army of over 100 PhDs, the central bank’s projections are notoriously unreliable and inconsistent. The Statement of Economic Projections routinely reveals wide divergences among policymakers themselves. Even the FOMC struggles to agree on a unified outlook.
So, if the forecasts are not helpful, what does the data say about the Fed’s current policy stance?
On inflation, the case for easing looks weak. The Fed’s preferred gauge, the core Personal Consumption Expenditures index, is running at 2.8%, above its 2% target. That suggests policy should remain restrictive to reduce demand. Complicating matters further, tariffs are starting to filter through into wholesale prices. The Producer Price Index rose 0.9% last month, the most significant jump in over three years. Higher input costs risk being passed on to consumers, raising consumer prices at a time when inflation is already sticky.
The employment picture also fails to support an immediate cut. The unemployment rate has remained in a 4.0%-4.2% range for the last year, relatively low by historical standards. Furthermore, according to the Federal Reserve Bank Atlanta Fed Wage Tracker, wage growth has decelerated from 6.7%, but at the current level of 4.1%, it is still positive and above inflation.
While the August jobs report showed weaker-than-expected hiring, one month does not make a trend. If the jobs data becomes increasingly unreliable, a concern shared by the White House and other economists, it may take more time to get an accurate read on the state of the labor market. Again, from a data-only perspective, trends in the labor market does not yet justify the need for a preemptive rate cut.
So why does the White House, among others, argue rates are too high? One reason is that momentum matters. The rate of change may be more important than the level. Even if unemployment is low and steady, a sharp rise in job losses should carry weight. Given monetary policy lags, waiting for confirmation could cause preventable damage to the economy.
Another reason is concern over housing. Inventories are rising and prices are slipping in many regional markets. The worry is that weakness in the housing market could spill into broader employment and spending data. President Trump wants to see lower mortgage rates to boost the commercial and residential real estate sectors.
Other well-known economists share the view that Powell is again late to act. “If you simply look at data, by the time you get a clear indication of what you should have done a few months ago, it’s too late,” said Mohamed El-Erian, Chief Economic Advisor to Alliance, in an August 20 interview on CNBC. While true, the existing Powell framework emphasizes the certainty of a decision rather than getting the timing perfect.
Still, Powell faces a credibility dilemma. If the Fed appears to cave to political pressure, markets may punish it. The Fed controls the overnight rate, but not long-term rates. If bond investors suspect the central bank is ignoring inflation, they could sell U.S. Treasuries, driving yields higher. That would push mortgage rates up and raise government borrowing costs, the opposite of what policymakers want.
Ultimately, markets—not politicians—will decide whether the Fed is on the right track. A premature cut risks undermining the very credibility Powell has spent years defending. He will not abandon his data-dependent framework with such little time left in his term. He may ultimately cut rates, but not because the White House demands it, but because the data support the move.